Labor is working well but it is easy to imagine this relief might be short-lived

September 12, 2012

12 September 2012,

By David Hetherington.

The big day has come and gone. Like a nervous couple awaiting a first newborn, Australia’s Labor government had approached the arrival of its carbon tax on 1 July with a mix of hope, excitement and anxiety. A healthy start promised happy times ahead, but there was always the risk that something might go badly wrong.

In the face of fierce criticism and flagging support, Labor had staked its political future on the carbon tax, and knew only too well that a flawed launch would be fatal. The conservative opposition had run a ferocious scare campaign, arguing that the tax would slug households and cripple the economy.

Given the build-up, the carbon tax has been something of an anti-climax. Growth and employment remain strong (for now), reports of price gouging – widely feared – have been few, and implementation problems non-existent. With this result, Labor leaders will have breathed a collective sigh of relief.

The party’s spirits have been further buoyed by the announcement of new policy initiatives including a national dental care program, expanded schools funding and trials of a disability insurance scheme. Labor has even managed to secure a solution to the problem of asylum seeker boat arrivals (albeit one whose toughness has angered much of its progressive base).

So government MPs are expressing both relief and optimism, sentiments reinforced by opinion polls which show Labor halving the opposition’s lead over the last six months.

Yet it is easy to imagine this relief might be short-lived. Ominous emerging signs suggest that Australia’s 21 year run of strong, consistent economic growth may be at risk. The direct economic threat is the continuing slowdown in China which in turn weakens commodity prices. Iron ore prices, for example, have fallen by over a third so far this year, and the drop in coal prices has been similar. Together the two commodities form 40 per cent of Australia’s export income, so these falls have a dramatic effect on the national economy.

At a minimum, they mark the end of the investment phase of Australia’s decade-long mining boom. The recent announcement by BHP Billiton that it would not proceed with the long-planned expansion of its Olympic Dam project sent a stark message to Australians that we can no longer rely on mining alone to sustain national prosperity. While the opposition’s attempts to blame the announcement on the carbon and mining taxes were roundly discredited, nothing could hide the reality that this signalled a changed environment for Australia.

The sense of economic unease will not help the government’s fortunes, and the flow-on effect to the Federal budget could be hugely damaging. Labor has set great store by its promise to return the budget to surplus this year, and the sudden disappearance of tax revenue means that sharp cuts will be required to meet this target. Most economists feel Labor should walk away from its promise, but given the government’s existing credibility problems, political realities dictate that Labor will eke out a surplus one way or another.

This budget challenge takes us back to those recent policy announcements. How will the government pay for them? At present, that is an open question, and one which is further hurting Labor’s credibility. Labor will not commit to detailed costings at this point, citing upcoming talks with regional state governments who will share the costs. The fact that the opposition has even bigger unfunded commitments seems to matter little to the media or the pundits.

For at least one initiative, expanded schools funding, Labor has explicitly ruled out tax increases to raise the extra money. This seems a curious position for a social democratic party with a history of delivering successful, taxpayer-funded public programs. It’s one reason why the public is confused.

For a government facing a slowing economy and an ongoing credibility problem, such confusion must be avoided at all costs if it’s to have any chance of building on recent momentum.